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In recent years, the global digital economy has taken multiple leaps forward, leading to the emergence of new concepts that are entering the world of finance, art, media, and commerce, and are garnering a lot of attention – both positive and negative. One such paradigm-shifting concept is the Non-Fungible Token (NFT). In this article, we will take a look at their significance, functioning, benefits, and challenges.
Understanding NFTs
Are Non-Fungible Tokens (NFTs) just the latest buzzword in digital economy discourse, or is there something more to them? NFTs represent unique digital assets and are built on blockchain technology, primarily Ethereum, signifying ownership or proof-of-right to an underlying asset. The underlying asset can for instance be digital or physical artwork, music, real estate, video clips, to even tweets.
Unlike cryptocurrencies like Bitcoin or Ether, which are fungible and can be exchanged on a like-for-like basis, NFTs contain distinctive information making each one distinct or “non-fungible”.
How NFTs Work
The idea behind NFTs is simple but revolutionary. A creator or owner “mints” an NFT on any supporting blockchain, tying it to a digital or physical asset. This process translates into providing a digital certificate of authenticity or proof-of-ownership stored immutably on a decentralized ledger. When an NFT is bought, sold, or transferred, the transaction is permanently recorded, maintaining a transparent audit trail which can be accessed at any time. This builds an intrinsic aspect of trust and security in NFT transactions.
Are NFTs Important?
The rise of NFTs is belieed by many to be a critical moment for the digital economy, galvanizing a broader recognition and opportunities for digital assets. NFTs have the potential to democratize access to wealth and ownership in numerous ways.
For artists and creators, NFTs represent a direct and flexible monetization medium, bypassing traditional gatekeepers and intermediaries. For collectors or investors, NFTs offer a new asset class with high speculative potential. Furthermore, NFTs could play a vital role in sectors like real estate, unlocking fractional ownership or facilitating more streamlined sales processes. In creative industries, NFTs could transform copyright and royalty payment structures, promoting fair compensation for creators.
NFT Trading and Trends
The NFT market went through a period of astonishing growth in the early 2020s, and NFT trading increased from 82 million USD in 2020 to 17 billion USD in 2021. In the first three months of 2021, over 200 million USD were spent on NFT purchases, partly propelled by a number of high-profile sales and auctions that got a lot of attention in both alternative and mainstream media.
At the peak of the NFT frenzy of 2020-2021, the main NFT platforms were Ethereum, Solana, and Cardano.
In 2022, the NFT market took a turn for the worse, and in May that year, an article in The Wall Street Journal proclaimed that the NFT market was collapsing, reporting how daily sales of NFT tokens were down by 92% compared to September 2021. The article also pointed out how the number of active NFT market wallets had decreased by 88% compared to November 2021.
The following year did not see much of a reversal of the trend, and by September 2023, a report from dappGambl – a cryptocurrency gambling site – claimed that over 95% of the world´s NFT collections had no monetary value.
Understanding the Background
Early projects
McCoy and Dash
In May 2014, Kevin McCoy and Anil Dash created the Quantum NFT. It consists of a video clip made by Jennifer, who is married to McCoy. Kevin McCoy registered the video on the Namecoin blockchain and sold it to Anil Dash for the eqvivalent of 4 USD during a live presentation at the New Museum in New York City.
McCoy and Dash did not call their creation NFT, they were talking about “monetized graphics”, but their transaction did link a non-fungable, tradable blockchain marker to a specific work of art, via on-chain metadata.
Etheria
The NFT project Etheria was launched at DEVCON 1 in London, in October 2015. This was only three months after the launch of the Ethereum blockchain and it was Ethereum’s very first developer conference.
Etheria had 457 hexagonal tiles available for purchase and trade. For more than five years, most of them remained unsold, but on March 13, 2021, all available tiles of the current version and a prior version sold out within 24 hours – for a total of 1.4 million USD. Each tile had been hardcoded to 1 ETH, which was worth 0.43 USD at the time of lauch.
Rare Pepes
Rare Pepes was a “semi-fungible NFT project” centred around the Pepe the Frog meme. Emerging in 2016, it involved a number of artists who contributed their works to a curated directory. The project emerged on Bitcoin through the Counterparty protocol.
ERC-20
Starting in 2017, several NFT project emerged on Ethereum based on the standard ERC-20. Ethereum´s first art NFT project utilizing the standard was Curio Cards, but it would be followed by many more. CryptoPunks emerged in June, and EtherRock in December.
The NFT Token Standard ERC-721
ERC-721 is considered to be the first bona fide non-fungable token standard. It was popularised in November 2017 by the blockchain game CryptoKitties. It should be noted, however, that this version of ERC-721 is different from the formally published one that came out in 2018.
CryptoKitties was a blockchain game developed by the Canadian studio Dapper Labs and players of the game could buy, create, own, and sell virtual cats by utilizing NFTs on Ethereum. By December 2017, the game had become so popular it caused significant congestion of the Ethereum network.
The community-driven paper ERC-721: Non-Fungable Token Standard was published in 2018 under the civic hacker initiative, with William Entriken as the lead author. This paper is largely hailed as the work that enabled the growth of a wide NFT eco-system. Among other things, it formalized the term Non-Fungible Token (NFT) in this context and established a standard for smart contracts – the ERC:721 standard. With this standard, each token has unique attributes and no two tokens are identical to each other.
During the height of the CryptoKitties and ERC-721 frenzy, a new market place called OpenSea was launched and it quickly attracted a lot of traders. By 2021, it had grown to a $1.4 billion market cap.
NFT Challenges and Considerations
While the prospects of NFTs are exciting, they come with certain essential considerations.
The environmental impact of minting NFTs, given the energy-consuming nature of blockchain technologies, has been a topic of concern.
Additionally, there are questions around copyright violations and intellectual property rights as the world of NFTs is still largely unregulated. The volatility and speculative nature of the market pose significant risks to investors, making sober, informed decision-making imperative in dealing with NFTs. The NFT market has been compared to both an economic bubble and a Ponzi scheme.
Conclusion
NFTs may be propelling a shift in how we perceive and transact assets, but the 2022 market crash – combined by harsher overall economic conditions in the world – has definitely cooled down investor interest.
Still, the basics of the NFT idea may become very important in the future, as we are moving into an increasingly digitilized world. By establishing verifiable, transparent ownership rights, NFTs could be disrupting conventional norms across an array of sectors.
Despite the challenges and complications they raise, NFTs offer a glimpse into a future of digitized value exchange that’s exciting – and scary – for many. As we continue to explore and understand them better, NFTs are likely to be a major part of the evolving digital narrative in some capacity.